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Reserve Requirements and Money Creation
hard

In a banking system with a reserve requirement of 20%, if a bank receives a new deposit of $1,000, the maximum amount it can lend out is ________.

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Choose the Best Answer

A

$800

B

$200

C

$1,000

D

$600

Understanding the Answer

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Answer

In a banking system, reserve requirements determine how much money banks must keep on hand and how much they can lend out. With a reserve requirement of 20%, the bank must keep 20% of the new deposit as reserves. For a $1,000 deposit, the bank needs to keep $200 in reserve. This means the maximum amount it can lend out is $1,000 minus $200, which equals $800. Therefore, the bank can lend out a maximum of $800 from that deposit.

Detailed Explanation

The bank must keep 20% of the deposit as reserves. Other options are incorrect because This answer suggests the bank can only lend the reserve amount; This option assumes the bank can lend all the money.

Key Concepts

Reserve Requirements
Money Creation
Bank Lending
Topic

Reserve Requirements and Money Creation

Difficulty

hard level question

Cognitive Level

understand

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